Must-read: Why higher oil prices helped natural gas liquids

Must-read: Why higher oil prices helped natural gas liquids

Natural gas liquids (NGLs) are another component of upstream energy production

Natural gas liquids, or NGLs, are a group of hydrocarbons (ethane, propane, butanes, and pentanes) that are often found alongside dry natural gas (methane). Many upstream companies (companies that produce crude oil and natural gas) garner a significant portion of their revenue producing and selling NGLs—especially companies that have a significant amount of “rich gas” assets, or natural gas assets “rich” in liquids. Some of these companies include Range Resources (RRC), Chesapeake Energy (CHK), SM Energy (SM), and Linn Energy (LINE). Price fluctuations in NGLs can affect the ultimate revenue and earnings of upstream companies, so NGL prices are an important indicator to track in the energy space.

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NGLs are made up of different compounds that receive different prices, and production streams are largely ethane and propane

According to a presentation by the Midstream Energy Group, the average NGL barrel composition in December 2011 was ~43% ethane, ~28% propane, ~7% normal butane, ~9% isobutane, and ~13% pentanes or heavier hydrocarbons. Using this representative composite barrel, NGL prices were up, closing at $36.41 per barrel for the week ended July 19 compared to $35.77 per barrel on July 12, which is a positive short-term indicator for companies with NGL production. The representative NGL barrel traded as high as ~$39 per barrel in mid-March, but since then, prices had largely declined, resulting in a medium-term negative indicator as well. But over the past several weeks, NGL prices have recovered somewhat, as WTI crude oil prices have shot to levels above $105 per barrel.

NGLs have historically tracked movements in crude prices, but prices have fallen relative to crude lately

Natural gas liquids prices have largely tracked crude oil prices historically. However, over recent years, the composite barrel as a percentage of crude price has declined. This is because ethane and propane make up a large percentage of the average NGL barrel, but these two commodities especially have experienced a surge in supply due to the shale boom and have experienced a decline in prices. However, there’s still a correlation between NGL prices and crude, and movements in oil prices can cause NGL prices to move as well. Recently, oil prices have spiked because of large inventory draws, and this was likely the cause behind higher NGL prices on the week. For more on this, please see Why another large inventory draw boosts oil prices, a short-term positive.

Outlook

This week saw NGL prices trade up, which is a positive in the short term. From a medium-to-long term perspective, many producers still find current price levels economic enough to continue to target and drill for NGLs, but they’ve suffered from the price drop. Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are found in the Vanguard Energy ETF (VDE).